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Distributions from a foundation to a founder - some considerations based on current legislation and the proposed new Foundations Act in Norway03/30/2017

The article will focus on the challenges that typically arise when the founder is a charitable foundation, or association with a similar purpose, that overlaps with the foundation's purpose. It will thus exclude typical "family foundations".

Let's say that a charitable foundation operates in many different countries. They have their headquarters in Paris, for example, but wish to set up a foundation in Norway that can help promote their purpose. In reality, this foundation composition will operate as a group. The problem that arises, and which will be discussed in the following article, is the movement of capital between the subsidiary foundations and the founder. The founder can make distributions to daughter foundations and daughter foundations can make distributions to each other, but for distributions from daughter foundation to parent foundation there are strict constraints in the law.

By way of illustration, one can envision a nonprofit organization, such as Doctors Without Borders, that starts foundations across national boundaries with the same charitable purpose. Assuming that the founder and the local foundation have the same purpose, a distribution from the foundation to the founder will nevertheless generally be illegal. Is this a reasonable arrangement? And will the proposed new legislation change the legal situation?

2. Legal basis

There is currently a general prohibition against making distributions to related parties, ref. section 19, second paragraph, first sentence of the Foundations Act:

"Distributions cannot be made to the founder, the founder’s close associates pursuant to section 5 subparagraph a, or to companies where some of these separately or together have decisive influence as mentioned in section 4, third paragraph. If there are special reasons, the Foundation Authority may grant exemptions from the first sentence."

The general rule is therefore that it is not permitted to make distributions from a foundation to a founder. This provision is based on the independence requirement and the need to highlight that starting a foundation must have a genuine effect for the founder.

There are exceptions to the general rule in the section 19, second paragraph, second sentence of the Foundations Act (see quote above). This provision has been used sparingly and has only been applied if there is a specific case. It has not been applied to future decisions.

3. Distributions from a foundation to another foundation with the same founder?

This layout resembles a "corporate group" in a corporate law context. The Foundation Authority, however, has assumed that the distributions between the two "sister foundations" are not in breach of the distribution ban:

"The Foundation Authority does not find that distributions from a foundation to another, with the same founder, causes a violation of the section 19 of the Foundations Act. The ban is primarily intended to apply where, for example, the founder has a stake in a company that the foundation wishes to distribute to. A foundation has no owners in the usual sense, it is owned by its purpose."

It is thus possible to "organize" oneself away from the distribution ban. The purpose as described in the rationale, however, could just as easily have been applied when the founder of a foundation is also a foundation.

4. Will the proposed new Foundations Act alter the existing state of the law?

Under the proposed new law, the rule that distributions should be in accordance with the foundation’s purpose will remain. In the following section, it is assumed that a distribution to the founder who is also a foundation, is in accordance with the foundation's purpose.

Proposed new wording of the legislation (section 59) reads as follows:

Section 59. Prohibition against distributions to founder etc.

Distributions may not be made to:

a) the founder or the founder's close associates pursuant to section 5 subparagraph a,

b) anyone who has contributed original capital to the foundation or to his/her close associates pursuant to section 5 subparagraph a,

c) a company where someone specified in subparagraphs a or b, separately or together, has decisive influence as mentioned in section 6, second paragraph.

If there are special reasons, the Foundation Authority may grant exemptions from the first paragraph. Such exceptions may be made for a single distribution or for future distributions to a specified recipient. The Foundation Authority may impose conditions for exemption under the first sentence, such as the recipient's use of the received funds.

The provision continues the distribution ban in the current law section 19, second paragraph. However, certain changes are made which are discussed below. First paragraph, subparagraph a and subparagraph c continue the ban against distribution to the founder’s close associates pursuant to the draft section 5 subparagraph a, or to the company where these persons separately or together have decisive influence as mentioned in the draft section 6. As mentioned above, this does not prevent distribution between sister foundations.

The Foundation Authority’s authority to grant exemptions remains, but with certain changes.
In accordance with the provision of the current law, the exemption warrant is limited to situations where there are special reasons. In the preparatory works for the current law, it is assumed that the provision will constitute a limited exception. On this basis, the Foundation Authority has in practice been somewhat cautious about using the exemption warrant.

The committee does not exclude that there may have been cases where exemption has been denied in situations where the distribution, even though it is covered by the ban’s scope, nevertheless appears loyal to the independence criterion and the foundation's purpose. The committee refers in this regard to what is said about the use of the exemption warrant in the preparatory works, where the committee after having pointed out that the exemption warrant is intended as a limited exception, states:

"This is meant as a limited exception. The purpose is to prevent non-profit organizations and the like which, together with other such organizations, start a foundation for a purpose that the organization fulfils, from not being able to receive distributions from the foundation. Another case that may be included is e.g. where a person has made a contribution to a foundation whose purpose is to pave the way for people with a particular disease, and where he/she later gets the same disease. In these cases, there does not exist the kind of close identification between the founder and the purpose that the general rule is otherwise meant to counteract the consequences of."

This committee especially emphasizes what is said about cases where there is "the kind of close identification between the founder and the purpose that the general rule is otherwise meant to counteract the consequences of ", and believes this should be emphasized when assessing whether an exemption application should be granted. The committee points out the possibility that the Foundation Authority is given in the draft second paragraph, third sentence, to set conditions for an exemption. On the basis of this provision, the Foundation Authority may ensure that an exemption is not used for disloyal circumvention of the purpose of the general rule, but ensure that the distribution that the exemption applies to is used for a specified purpose that is true to the foundation's independence and purpose.

The current authority to grant exemptions is interpreted so that an exemption may only be granted for individual, specific distributions. This frequently fails to safeguard the predictability that the foundations in question need, and therefore limits the practical significance of an exemption decision. On this basis, the committee proposes in the second paragraph, second sentence, that an exemption may also apply for future distributions to a specified recipient. This means that an exemption decision may give the foundation the necessary predictability for future distributions, and allows it to plan for this without it being necessary to submit a new application for each distribution.

On this basis, it willbe interesting to see how the authority to grant exemptions will be practiced when the new Foundations Act comes into force.